Does Retirement Moderate Income Inequality?

Source: http://www.flickr.com/photos/68751915@N05/

Source: http://www.flickr.com/photos/68751915@N05/

Income inequality among America’s working population may be increasing, but recently published research from the Employee Benefit Research Institute suggests that the gap between the wealthy and those near the poverty level may actually shrink when people reach the age of retirement.

The EBRI study follows two groups of people over a period of 10 years, measuring their income before and after they were 65 years old. Both both groups, pre-65 income was measured in 2000, and post-65 income was measured in 2010. Those with incomes of over $1 million were dropped from the study in an effort to reduce distortion from outliers. It’s also worth pointing out that the study measured household — not individual — income. The study methodology is pretty straightforward: measure the income levels of each group before age 65 and after age 65, and determine how much incomes have changed over time. Age 65 is used as a soft proxy for retirement in this case.

When this data was compared for Group One, it was discovered that those in the lowest pre-65 income quartile (earning an average of $25,378 in 2000) actually increased their income to an average of $36,613 — at the same time, those in the highest pre-54 income quartile (earning an average of $221,251 in 2000) decreased their income to an average of $123, 184.

Income Ratios

In order to answer why this is the case, the EBRI study digs into where income was coming from for each quartile. At a glance, it’s easy to see that while Social Security accounts for a significant part of post-65 income for all quartiles, it is regressive and therefore a much larger share of income for those in the lowest quartile. Post-65 income from Social Security alone is nearly enough to replace pre-65 labor income for the lowest quartile.

The data suggest that because of this, those in the lowest income quartile are able to exceed their pre-65 income levels after passing the age of retirement. Meanwhile, Social Security payments are not sufficient to replace lost income from labor for those in the higher income quartiles, so they experience a greater relative decline in income post-65.

This effect reduced the difference between the average income of the lowest quartile and the average income of the highest quartile from $195,873 to $86,571 in Group One of the EBRI survey.

Income 2

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